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March 4, 2002
The Disappearing State Corporate Income Tax
In state legislatures across the nation, lawmakers are scrambling to cope with revenue shortfalls. Increasingly, however, they can't look to the corporate income tax for much help. In an article for State Tax Notes magazine, Peter Fisher of the University of Iowa argues that tax incentives have played a key role in shrinking the revenue from state corporate income taxes.

"Incentives at the state level do not pay for themselves," Fisher contends. "In fact, they are quite costly." Since 1980, he points out, the share of state revenue coming from corporation income taxes has slipped from 9.7 percent to just 6.2 percent. Even without the enactment of new incentives, he predicts, corporate tax revenues will continue this decline as more firms take advantage of existing incentives.

In a related article, Kirk J. Stark of the UCLA School of Law asserts that state taxation of corporate income is "simply untenable." "Not much can be said for a costly tax that doesn't raise much money," he observes pointedly.

Over time, Stark explains, the decentralized decisions of corporate managers and political actors have transformed the tax into something it was never intended to be: a type of gross receipts tax, rather than an "income" tax in the traditional understanding of that word.

If policymakers want to preserve the corporate income tax, Stark suggests, then Congress should assign it solely to the federal government. Lawmakers could then devise some sort of revenue-sharing arrangement between Washington and the states.

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STATE TAX NOTES is a weekly magazine covering state tax issues.

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Media Release 2002-2

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